Selling carpets and flooring may not be a sexy industry but shareholders of Victoria plc (LSE: VCP) won't be complaining as their shares have risen over 635% in value in the past five years alone. The stunning growth in Victoria's share prices isn't without reason, as we see in the below chart.
Pre-tax profits (£m)
Adjusted earnings per share (p)
The key to this success has been a business model focused on acquisitions that sees Victoria buy up small business and then use economies of scale to improve margins. The higher cash flow from rising margins is then ploughed back into new acquisitions.
Like other frequent acquirers, Victoria has used leverage to increase returns but this isn't too much of a problem as net debt after a series of recent purchase is only two times EBITDA. This is a completely sustainable amount of leverage and even fell year-on-year despite a series of acquisitions.
Looking ahead, there is still has plenty of room to grow as the market for carpeting and flooring is highly fragmented with many family-run companies. And because Victoria manufactures, distributes and sells its products it has higher margins than competitors.
Shares of Victoria are also attractively priced at 20 times forecast forward earnings. The combination of margins and like-for-like sales continuing to grow alongside acquisitions and a burgeoning business in Australia make me confident that the future is bright for this relatively boring carpet and flooring maker.
Taking care of the boring bit of an exciting market
Video games are generally much more interesting than carpets but Keyword Studios (LSE: KWS) takes care of the less-than-exciting aspects of your favourite game such as translation into local languages, testing and quality control.
While this isn't the sexiest part of the business, it's been big money for Keyword and its shareholders as the value of its shares have jumped over 300% in the past five years alone. And growth isn't likely done yet as City analysts are pencilling-in a whopping 200% jump in earnings per share in fiscal year 2016 alone.
Much of this growth is down to a series of small bolt-on acquisitions but the company has also experienced 30% like-for-like sales growth year-on-year in H1. It's no surprise that the company continues to grow organically as big game-makers often find that outsourcing the nitty gritty work to Keyword is quicker, cheaper and more efficient than taking care of it in-house.
As Keyword adds new services, both organically and through acquisitions, I expect this phenomenon to continue to build on itself. The company is also just beginning to target huge, relatively un-tapped Asian markets such as China and South Korea
In addition, the group's profitability continues to increase as the business isn't capital-intensive and economies of scale go a long way. For example, gross margins rose from 34.4% to 35.1% in H1 2016 and the company retained net cash of EUR3.5m even after spending EUR13.7m on acquisitions in the period.
Keyword's shares are priced for growth at 32 times forward earnings but the company is growing quickly and has a significant competitive advantages over competitors, which is enough to interest me.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Keywords Studios. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.